I. The problem back to top

Setting the scene

In March 1995 the United States claimed that its domestic underwear industry was being seriously damaged or threatened with actual damage by imported cotton and man-made-fibre underwear(1) from Costa Rica and six other countries.(2) The United States initiated consultations with the countries alleged to be damaging or threatening its industry with the intention of invoking the transitional safeguard provisions of the Agreement on Textiles and Clothing (ATC).(3) During the course of these consultations, three of the seven countries agreed to quantitative restrictions on the imported underwear that would be allowed into the United States. However, after failing to reach agreements with Costa Rica, Honduras, Thailand and Turkey, the United States in June 1995(4) introduced restrictions on the importation of cotton and man-made-fibre underwear backdated to take effect starting in March 1995.

With the unilateral introduction of restrictions, the case was referred to the Textile Monitoring Body (TMB) for review and recommendations regarding the matter as required by the ATC. The TMB found that the United States had not demonstrated that its industry had suffered serious damage. However, it could not reach consensus on whether the existence of an actual threat of serious damage had been demonstrated, and thus recommended further consultations among the parties.

The United States eventually reached agreements with Honduras, Thailand and Turkey after further consultations. However, the United States and Costa Rica were unable to reach a mutual understanding after consultations in August 1995 and November 1995. On 22 December 1995 Costa Rica began the dispute settlement process under Article XXIII of the General Agreement on Tariffs and Trade (GATT 1994) and the corresponding provisions of the ATC.

Why did Costa